What’s driving the merger ambitions of US Airways’ CEO Doug Parker

A merger with American and the mega-carrier it will create represents the dream of just about every airline CEO. After being burned by Delta five years ago, Parker is confident this is his moment.

— Jason Clampet

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US Airways chief executive Doug Parker is in hot pursuit of a dream — to create what could be the world’s biggest airline.

Parker’s target is bankrupt American Airlines. A merger between American and US Airways, the dominant airline at Philadelphia International Airport, would create a company that is wonderfully well-positioned in a complicated industry that has been forced to consolidate.

The bigger the airline, Parker believes, the better the chances to strengthen routes, dictate pricing, and grow profits.

The stakes are high for all the parties, especially US Airways’ creditors and shareholders, the employees of American Airlines, and price-conscious air passengers riding out a miserable economy.

US Airways plane in terminal at Los Angeles International Airport. Photo by Neil Kremer.

American is not a willing partner. It wishes to emerge from bankruptcy as a stand-alone company. So Parker is setting a whirlwind pace to make a merger happen. In recent weeks, he has:

Purchased a small piece of the debt of beleaguered AMR Corp., American’s parent company, to become a creditor in American’s bankruptcy proceedings.

Won the support of American’s three major unions. US Airways reached tentative contract agreements with them in April, should a merger occur.

Given a speech at the National Press Club touting the benefits of a merger as the best option for competing with larger rivals United and Delta.

Met over breakfast in Washington with American chief executive Tom Horton. According to a statement from American, Horton stressed that American must “pursue the right plan, which includes several interesting options” for how it could restructure.

Last Friday, US Airways received a nondisclosure agreement from American that would allow the two companies to exchange confidential financial information. US Airways is currently reviewing it, a spokesman said.

This activity comes after American announced July 10, possibly at the urging of its creditors, that it was ready to consider strategic alternatives, including a possible merger, in addition to its own preferred plan to exit bankruptcy as a stand-alone company.

Parker’s diligent pursuit of a merger stems from his long-held belief that further industry consolidation is needed to allow US Airways to better compete and to create a stronger route network, solid profits, and more flexibility in pricing.

On an earnings call last Wednesday, Parker, 50, whose style is personable and low-key, said if the merger-review process is not fair and balanced, “We will evaluate our options to make sure that the real parties and interests — AMR employees and creditors — get the chance to evaluate the merits of an AMR-US Airways merger.”

US Airways confirmed it bought $1 million worth of AMR’s debt for the discount price of $630,000. The airline, which transports 70 percent of air passengers here, said it had purchased the debt “to ensure that we would have standing to participate” in American’s Chapter 11 bankruptcy proceedings. “We love it!” analyst Vicki Bryan of the New York corporate bond research firm Gimme Credit L.L.C. wrote in a recent client note. “We think US Airways is crazy like a fox.”

As an unsecured creditor of American, US Airways has a right to “important information available only to bondholders” that will help it evaluate “what a mess American really has become and study the plans the carrier is trying to craft to appease its creditors, unions, and especially the bankruptcy court judge who will make the final decision” about American’s fate, Bryan wrote.

Buying a chunk of a company’s unsecured debt “is a timeworn strategy” used by such well-known corporate raiders as Carl Icahn, “who we know has often purchased the debt of distressed companies he wanted to buy so he could steer the bankruptcy process — if not control it altogether,” Bryan said.

Many industry analysts see US Airways as the favorite contender for a merger, although American is also reaching out to other investors and airlines, such as Alaska and JetBlue.

US Airways has garnered Wall Street support with its message that a larger network of connections would better compete nationally and internationally with United and Delta, now No. 1 and 2 in size among U.S. airlines.

Parker says a merger would be good for consumers. A third giant airline would put price pressure on the others. Some observers contend that fares rarely go down after mergers. Airlines can charge more when there is less competition.

In an American-US Airways merger, Philadelphia would likely remain a hub for the larger carrier and might even get more international flights. American has a major operation at New York’s JFK airport, but there is no room for growth there.

“Of the airlines targeted by American, JetBlue and Alaska don’t seem willing, and even if they were, neither is a credible response to Delta’s overall East Coast strength,” airline analyst Daniel McKenzie of Rodman & Renshaw wrote to clients Tuesday.

“Ultimately, we believe US Airways puts a sufficiently compelling deal in front of the unsecured creditors’ committee,” McKenzie said, adding that the timing of a merger would be better before American emerges from Chapter 11 reorganization. American has until Dec. 28 to present its restructuring plan to a bankruptcy judge.

Parker mounted a similar effort in 2006-2007 to merge with Delta, then in bankruptcy. Delta employees launched a “Keep My Delta” campaign to ward off that bid.

This time around, American’s unions are backing a merger with US Airways. “The unions may not believe in miracles, but they do believe they will have a better future with a larger, financially stronger airline that is decidedly not run by Mr. Horton and his team,” Bryan of Gimme Credit said recently.